Q&A: How Investors Feel About India

“It was a very ordinary budget,” said Michael Spencer, Deutsche Bank’s chief economist for the Asia-Pacific region.

Michael Spencer, Deutsche Bank’s chief economist for the Asia-Pacific region and co-head global economics, is worried that foreign investors may write off this year for investments into India.

In an interview with India Real Time’s Megha Bahree, Mr. Spencer discusses investor sentiment on India, how China doesn’t want Shanghai to turn into Mumbai and the spending cuts in the U.S. Edited excerpts.

The Wall Street Journal: What did you think of the federal budget recently unveiled by Indian Finance Minister P. Chidambaram?

Michael Spencer: It was a very ordinary budget. It just delivered on what had been anticipated but there was nothing in it that spoke to the corporate sector to say it was time to invest in India.

WSJ: After nearly two years of near policy paralysis, the Indian government has in the past few months announced a handful of measures including opening up to foreign investments in sectors ranging from retail to aviation, as well as announcing a move to issue new banking licenses. Has it been enough to restore investor confidence?

Mr. Spencer: It has been, in a sense. But there’s still a lagging sense amongst investors of why it hasn’t been resolved completely. The message I’m getting from investors is that this is a positive step, but there’s still some lingering uncertainty, especially on things like retrospective tax and taxing foreign investors. In the last year or two in India we have seen slower growth as well as governance issues and now we are getting into election year with national elections slated for 2014. Investors are saying I’m going to sit back and wait for a more positive signal but in my opinion that would be a missed opportunity. Private investment demand in India has downshifted in the last year or two. Portfolio investors will turn positive if they see domestic businesses putting money in.

WSJ: In the budget, the finance minister said that the infrastructure sector needs an investment of $1 trillion over the next five years. This figure has been bandied about in the past as well. Are foreign investors interested in investing in this sector?

Mr. Spencer: India is not the only Asian country that talks about these infrastructure investment opportunities. Asia has been talking for years about the trillions in infrastructure funds.

Indonesia has been saying that for 10 years. It speaks to the difficulty of doing business in these countries. In both India and Indonesia, it’s difficult to get land. The problem is that everyone in Asia gets compared to China, which is just not a fair comparison.

To be sure, India needs more acute infrastructure investment than Indonesia. The constraint in India is that the government just can’t afford to pay for these projects because of a gaping deficit. One solution is in public-private partnerships through which foreign investors can come in. India is one of the most successful countries when it comes to executing these public-private partnerships.

WSJ: What’s your opinion on the recent leadership change in China?

Mr. Spencer: I’m hugely positive on China. What we have in China is a new leadership that’s very committed to economic and financial reform and equally committed to no political reform. So what will happen very quickly is a rapid deregulation of the financial sector but there will be very little progress on social issues. We will see very incremental reform of the hukou registration system—the household registration system that divides households into urban and rural, and under which citizens can access services like education and healthcare only in areas where they are registered. Cities will get more power, but it will be very incremental.

Prakash Singh/Agence France-Presse/Getty Images

“In both India and Indonesia, it’s difficult to get land,” said Mr. Spencer.

WSJ: Any views on Pakistan or Afghanistan?

Mr. Spencer: We view Pakistan as a potential risk. The U.S. forces are set to withdraw from Afghanistan next year and that creates a security risk in Pakistan that can impact India.

Mr. Spencer: Government spending in the U.S. has been shrinking for the last two years, and, in general, government spending has been falling at the fastest rate in 50 years. The logic of the sequester—predicated as it appears to be on “out of control” government spending supposedly crowding out a weak private sector—is not borne out in the data.

Government spending is falling, not rising, and private demand is apparently very healthy. The question for the U.S. for this year is: How much more austerity and fiscal tightening will it undertake?

The U.S. seems to have embarked on the same path of fiscal austerity as Europe, and in the fourth quarter of last year there was virtually no growth in the U.S. because of it. The dominant meme of the U.S. government is that it’s been spending too much. To cut spending so aggressively that you threaten growth is to me absurd. The logic behind the sequester is absurd. It’s not looking at the data. Sequester is the wrong medicine for the wrong problem. The U.S. is in much better shape than people think.

Europe, on the other hand, is in recession and will continue to be in recession for another quarter at least. There has been a credit constraint on the European economy and consumers don’t have the confidence to start spending again. But the fiscal drag on growth will disappear by the middle of this year and that will allow private demand to grow. If Europe returns to growth, it’s positive for India as it exports to Europe.

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